Everything was going along swimmingly. Markets were up. Italian borrowing costs were at 2-year lows.

And then BAM.

Former Prime Minister Silvio Berlusconi has reentered the picture, launching an attack on the current Monti government, and hinting he could make a return to politics in the coming days, according to FT.

Bear in mind, that Berlusconi has made several "hints" about returning to politics since he was ousted in 2011, but what's new is that in parliament just now, Berlusconi's party abstained from a key vote, denying current (unelected) PM Mario Monti a full majority.

The Italian market has gone sharply negative and yields have spiked after political chaos breaks out.

The big issue is tension between Monti's party, and Berlusconi's party, which abstained from a key vote.

The key thing is that Monti government has been very good for Italy's finances (both in terms of getting things done, but also in terms of raising Italy's standing in Europe). There are elections in April, but a weakening of his faction before then would be ominous. And since he's unelected, ruling by consensus is particularly important.